Over the past year, the highest level that the BT Group (LSE:BT.A) share price hit was 161p. At the current price of 119p, this seems quite a way away. Yet with several positive developments coming through, I believe there are a couple of reasons why the stock could rally back to this level within the next year.
New EE powering forward
In October, it was announced that BT customers would be able to access and benefit from EE broadband deals in the future. This convergence of products and services is a good outcome for customers. EE broadband is often voted the best in class by different independent parties.
I think that over the course of the next year, BT should be able to benefit in two main ways. It should be able to retain more existing customers when current packages need renewing. Further, it should be able to win over new customers from competitors due to the strong reputation that EE carries with it.
The net result is that revenue could increase. In the H1 2024 results, the retail full-fibre base stood at 2.1m. And the Customer division generated £1.3bn in adjusted EBITDA. The customer base jumped by 48% year on year. I think it could increase by a similar amount over the coming year with the lure of EE and continued rollout.
This jump in customer numbers of around 50% could translate into a similar jump in revenue and other financials. If so, I think the share price could also jump 37% to hit 161p.
Finding a fairer value
Another reason why 161p seems reasonable to me is from comparing the price-to-earnings (P/E) ratio. At the moment the ratio is 6.08. I see anything less than 10 as being undervalued.
The H1 2024 report showed basic earnings per share of 8.6p. If I assume the H2 figure is the same, the annual earnings per share would be 17.2p. Using the current share price of 119p, the P/E ratio would increase slightly to 6.91.
If I assumed that the share price rose to 161p by the time the full-year results came out next year, the P/E ratio would be 9.36. I feel this would be a much fairer figure given my benchmark of 10.
Of course, just because 161p would equate to a fair valuation for BT, it doesn’t mean that it has to happen. A stock can remain undervalued for years! But it wouldn’t be a surprise to see the price rising simply to factor in the rising earnings.
The action plan
The main risk to my view is the change of leadership at the top. The new CEO is due in January. Any change carries uncertainty about the future direction and strategy of a business.
Despite this concern, I believe there’s good potential for the stock to rally back to the 52-week highs over the course of the next year. On that basis, I feel it’s a good stock for investors to consider adding to their portfolio.
